What Is Free Cash Flow?
Free Cash Flow (FCF) is the money a company has left over after it pays for its basic business costs—like paying employees, covering rent, and buying supplies. It’s basically the cash the company is free to use however it wants, like paying dividends, paying off debt, or reinvesting to grow the business.
Think of it like your paycheck. After you pay your bills and buy the stuff you need, whatever’s left is your free cash—money you can save or spend on whatever you want. That’s kind of what Free Cash Flow is for companies.
How Do You Calculate Free Cash Flow?
There’s a simple formula to figure it out:
Free Cash Flow = Operating Cash Flow – Capital Expenditures
- Operating Cash Flow is the cash the company makes from its main business.
- Capital Expenditures (or “CapEx”) are things the company buys to keep the business running long-term, like equipment or buildings.
So if a company makes $500 million in operating cash flow and spends $200 million on CapEx, its Free Cash Flow would be $300 million.
Why Is Free Cash Flow Important?
Free Cash Flow shows how strong a company really is. Even if a company shows profits on paper, that doesn’t always mean it has cash in the bank. Free Cash Flow shows what’s actually left after the company handles its business.
Here’s why investors care about it:
- It can be used to grow the company (like opening new locations or launching products)
- It can be returned to shareholders through dividends or stock buybacks
- It can help reduce debt, which makes the company more stable
A company with strong and steady free cash flow is usually in good shape financially.
What Does Negative Free Cash Flow Mean?
If a company has negative Free Cash Flow, it means it’s spending more than it’s making. That might sound bad, but it’s not always a red flag. Sometimes, companies spend a lot on new projects or equipment that will make them more money later.
But if a company has negative FCF for a long time and isn’t growing, that could be a warning sign.
How Do Investors Use Free Cash Flow?
Investors often look at FCF when they’re trying to decide if a company is a good investment. Some even use it to figure out what a company is really worth. It’s also a great way to compare similar companies—if one company has a lot more free cash than another, it might be the better bet.
Conclusion
Free Cash Flow is a key number that tells you how much money a company actually has left after running its business and paying for big purchases. It’s a powerful sign of a healthy, well-run company. If you’re serious about understanding where to invest, learning how to look at Free Cash Flow is a big step forward.
